A call provision included with a sinking fund effectively adds a maturity option to a preferred stock issue.

Question

Quizplus · Accepted Answer

A call provision allows the issuer of preferred stock to call back or redeem the stock from the shareholders at a predetermined price. When a sinking fund is also included, the issuer may have the option to use the funds accumulated in the sinking fund to call back the stock. This effectively adds a maturity option, as the stock can be redeemed at a certain point in time, giving investors some certainty about the return of their investment.

A Call Provision Included with a Sinking Fund Effectively Adds